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Arizona is going to court over its Colorado River water. Here is what it means for Phoenix-area real estate.

The Central Arizona Project, which delivers water to most of the state, has joined Nevada's lawsuit against the federal river plan. The case will take time, and that uncertainty is now part of every growth decision.

By Jon Willis, Founder & Designated Broker · · 6 min read

On October 27, the Central Arizona Project asked to join Nevada's lawsuit against the U.S. Interior Department over its new plan for the Colorado River. Arizona's water department had already moved to join the case earlier this month. The fight over the river has moved from the negotiating table to the courtroom.

Yesterday we wrote about how Arizona's coming water cuts will shape growth. This lawsuit is the next chapter, and it matters to anyone who owns, buys or develops property in central Arizona.

What happened

  • The lawsuit. Nevada sued the federal government in August, arguing that the Interior Department's new 10-year framework for the river is illegal and unfair to the Lower Basin states: Arizona, California and Nevada. Arizona and now CAP are asking to join.
  • The stakes. In the worst case, the plan could take up to 3 million acre-feet a year from the Lower Basin, roughly 40% of its supply. Over the next two years alone, the three states would give up 1.25 million acre-feet, including 760,000 acre-feet of Arizona's 2.8 million.
  • The argument. The plan cuts the Lower Basin but places no new mandatory cuts on the Upper Basin states of Colorado, Utah, Wyoming and New Mexico. For the first time, those states fell short of their delivery obligation under the 1922 Colorado River Compact over the 10 years ending this September.
  • The other side. The Interior Department has accused Arizona of "playing politics" and says a lawsuit will not add water to the river. Colorado's Upper Basin commissioner says Arizona should "use only what the system provides."

Why CAP matters so much

CAP's 336-mile canal carries Colorado River water to the Phoenix and Tucson areas. According to the Arizona Republic, it supplies at least some water to about 80% of Arizona's residents and 90% of its economy, including more than 50 cities and industrial users and 11 tribes.

CAP also sits at the back of the line within the Lower Basin, which means it takes the deepest cuts first. KJZZ reports CAP's supply could be cut in half as soon as next year. CAP general manager Brenda Burman says the federal plan could take the system "to zero" in the driest years.

A lawsuit does not create water. What it creates is uncertainty, and markets put a price on uncertainty.

What the lawsuit does and does not change

  • It will not be fast. No quick ruling is expected. Expect the question to hang over the market for a year or more.
  • Near-term cuts are still coming. CAP says it remains committed to the Lower Basin's two-year, 1.25 million acre-foot plan while it fights the longer-term framework.
  • A deal is still possible. Arizona, California and Nevada are negotiating how to split the cuts, with a January 1 deadline. Talks have reportedly stalled, but Burman says the states are still talking.
  • It could escalate. Arizona leaders have said the dispute could end up at the U.S. Supreme Court, an option water experts have urged against.

What it means for commercial real estate

Land and development

This is where uncertainty bites first. Developers need confidence in long-term water before they commit to entitlements and infrastructure. Expect buyers to ask for longer due diligence periods, water contingencies in contracts and lower prices on land that depends on new or unproven supply. Land with a documented water position becomes more valuable, not less.

Which city you are in matters more than ever

Not every city leans on CAP the same way. Tempe gets about 11% of its water from the Colorado River and most from the Salt River Project. Scottsdale gets more than 70% from the Colorado River. Over time, we expect buyers, tenants and lenders to start pricing that difference.

Industrial and large users

Manufacturers and data centers are making 20- and 30-year location decisions. A river in litigation is something their site selection teams will flag. Sites with access to recycled water or a diverse municipal supply will hold an edge.

Income properties

For stabilized retail, office and multi-tenant investments, the near-term impact is modest. The risk is slower: rising water costs passed through to tenants, possible conservation rules and more questions in due diligence. Underwrite it; do not panic over it.

Keep it in perspective

Arizona has prepared for shortage for decades. Greater Phoenix uses less water today than in 1985 despite adding about 3 million people, and cities are investing billions in recycling, storage and new supplies. Growth will continue. But for the next year or more, the question will be not whether Arizona grows but where, and on whose water.

What we recommend owners do now

  1. Know how much your city relies on CAP. Ask your water provider what share of its supply comes from the Colorado River and what it has in storage.
  2. Watch the January 1 deadline. A three-state deal would take some uncertainty off the table. No deal raises it.
  3. Build water into land contracts. Buyers and sellers of development land should plan for longer timelines and clear water contingencies.
  4. Get a valuation that accounts for water. We factor water into every opinion of value we prepare.

Sources

This article is general market commentary, not legal or water-rights advice. Consult qualified counsel and your water provider before acting.